Spending restraint and rainy day fiscal relief

We may need more economic stimulus options soon. Because most state constitutions have some requirement for balancing their operating budgets, they can’t borrow their way through hard times the way the feds can. That’s both good and bad.

If California, for example, could borrow when revenues fall, it would help meet expenditure demands for programs the public wants and needs, rain or shine. Of course, it’s best to balance borrowing with enough fiscal discipline to retire the debt when times are good. What is needed is a kind of “rainy day fund,” but financed with medium-term borrowing instead of savings.

To overcome the complications of state constitutions and legislative politics, this fund should be federal. In a recession, when a state’s revenues drop more than a certain percentage, the state would be entitled to a federal loan to cover a portion – say half – of the gap. The state would repay the loan before the next recession hits through cuts in federal matching funds for highways and Medicaid, which the state would raise with some combination of improved post-recession revenues, new taxes and state spending cuts. Run the program with a council: the Treasury secretary, the Office of Management and Budget director, and the nonpolitical head of the Federal Reserve as chairman.

Why should the feds help Californians, who choose to tie themselves up in ballot initiatives, super-majority requirements in their Legislature, Proposition 13, and other forms of sadomasochistic civics? A Rainy Day Borrowing entitlement would balance human needs, economic recovery and only moderate enabling of dysfunction in California and elsewhere.

Christopher Edley Jr. is dean of the UC Berkeley School of Law. To read more Blue Sky essays, go to ideas.berkeleylawblogs.org.